Will China Ruin Honda's Long-Term Profits?

Despite solid sales in the United States, Honda (NYS: HMC) is cutting its revenue guidance for the year because of slow sales in China. A dispute between Japan and China over who owns a group of islands in the East China Sea is hurting Honda's bottom line, and needs to be corrected to strengthen long-term growth.

Current affairs and future projectionsHonda's revenues were up 20% this quarter, and net income was up 36%. But, despite increased revenue and net income, Honda has cut its net income projections for the fiscal year, ending in March, to $4.7 billion, 20% lower than projections in July. Operating and revenue forecasts have been lowered, as well, and sales projections for 2013 have dropped from 3.54 million cars to 3.49 million cars. You have both China and Japan to thank for all this.

In mid-September, Japan announced they were purchasing a group of islands that China lays claim to. In response, some Chinese consumers protested against Japanese products, including cars. At the height of the protests, one Chinese Honda owner burnt his Accord, and others overturned vehicles. As a result, Honda shut down production for several days, and Honda sales in China went down 40.5% in September.

Honda's not the only Japanese manufacturer that's been hurt by the tensions between the two countries. Nissan's sales in China were down about 49%, and Toyota's (NYS: TM) sales were down about 35%. The short-term impact of the political scuffle between China and Japan may look bad, but it's important to consider the big picture.

A pothole, not a sinkholeDespite the drop in sales, Honda is currently building a plant in China to boost its automotive manufacturing in the country. The Japanese automotive company produces 770,000 automobiles in China, and wants to increase that to 1.01 million by 2014. Sales in China only account for about one-sixth of Honda's overall sales, but the company sees the future potential of having a significant footprint in the country. Trade between China and Japan was $345 billion last year, so it's in the interest of both countries to not escalate the situation.

Although the disagreement between the two countries has brought down earnings for Honda, and will likely hurt them next year, investors shouldn't be concerned long term. According to Edmunds.com, sales for new cars are expected to increase by 11% in October, and Honda is expected to see huge sales in the U.S because of its newly-redesigned Accord.

There is money in selling cars to China ­-- just ask GM (NYS: GM) . It posted a $3.2 billion profit in China just last year. So a short-term drop in Honda's China sales doesn't spell disaster. As long as Honda addresses the China sales drop, and China and Japan can patch up their differences, investors can consider all of this as just a minor bump in the road.

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